Ireland: Documenting Derivatives With Irish Regulated Funds - July 2015

Last Updated: 5 October 2015
Article by Kathleen Garrett and Dara Harrington

CATEGORIES OF FUNDS IN IRELAND

There are two broad categories of regulated investment funds in Ireland:

  • UCITS; and
  • AIFs.

Either category of fund may be established as a single fund or as an umbrella fund comprising one or more sub-funds, each of which may have different investment objectives and policies. The forms which both categories of Irish fund can take are broadly as follows, with the main characteristics of each outlined later in this bulletin:

UCITS

The principal benefit of a UCITS classification is that the fund may be offered to the public throughout the EU subject to compliance with the cross-border notification procedures specified by the UCITS Directive (the "UCITS passport"). UCITS may be offered to both institutional and retail investors. Due to the potential for distribution to retail investors throughout the EU, UCITS are subject to an EU-wide regulatory regime in terms of eligible investments and diversification requirements. From a regulatory perspective, UCITS funds may invest in financial derivative instruments (exchange-traded or over-the-counter ("OTC") for investment purposes as well as for efficient portfolio management ("EPM") purposes subject to certain conditions including:

  • the reference item or index to which the derivative relates must be an eligible investment and must come within the UCITS investment objectives;
  • the counterparties are regulated institutions of a type approved by the Central Bank of Ireland ("Central Bank");
  • the derivatives are subject to reliable and verifiable valuation on a daily basis and can be sold, liquidated or closed by an offsetting transaction at any time and for fair value; and
  • compliance with the global exposure, counterparty exposure and cover requirements prescribed by the Central Bank's UCITS Notices and the derivatives risk management process adopted in respect of the UCITS.

AIFS

The other category of regulated investment funds in Ireland are AIFS, the managers of which are subject to the regulations implementing the EU's Alternative Investment Fund Managers Directive ("AIFMD"), which came into effect under Irish law in July 2013 and introduced the changes summarised in the table below. The two principal types of AIFs are QIAIFs and RIAIFs. The professional investor fund ("PIF") category was discontinued but the Central Bank allowed existing PIFs as at 22 July 2013 to continue in existence.

AIFMD regulates:

  • EU AIFMs who manage AIFs in the EU; and
  • Non EU-AIFMs which manage EU AIFs or which market EU or non-EU AIFs in the EU.

AIFMD provides for the marketing of AIFs to professional and retail investors across the EU and the opportunity to manage AIFs domiciled in Member States (other than the AIFM's home Member State) (the so called "AIFMD Passport"). The rules applicable to AIFs are set out in the Central Bank's AIF Rulebook. QIAIF's and RIAIF's can be managed in the following manner:

There are certain borrowing, investment and subscription requirements applicable to QIAIFs and RIAIFs. QIAIFs are invested in by qualifying investors belonging to one of the following categories:

  • an investor who is a professional client within the meaning of Annex II of MiFID; or
  • an investor who receives an appraisal from an EU credit institution, a MiFID firm or a UCITS management company that the investor has the expertise, experience and knowledge to understand the investment in the QIAIF; or
  • an investor who self-certifies that they are an informed investor.

The minimum subscription amount for a QIAIF is €100,000 and it is not subject to investment, borrowing or leverage limits. Nevertheless, there is a statutory requirement to spread risk if the QIAIF is established as an investment company. In contrast, there is no minimum subscription requirement for a RIAIF. However, borrowings cannot exceed 25% of a RIAIF's net assets but, in contrast to a UCITS, borrowings can be effected for investment purposes as well as to meet redemption requests.

AIFMD PASSPORT

AIFMD Passport automatically became available to EU AIFMs managing EU AIFs when AIFMD was transposed into Irish law in July 2013. However, different rules apply in respect of non-EU AIFMs. A non-EU AIFM of an Irish QIAIF will not be able to avail of the AIFMD Passport until late-2015 at the earliest.

The European Securities and Market Authority ("ESMA") is to issue advice to the European Commission on the application of the AIFMD Passport to non-EU AIFMs by 28 July 2015. If that advice is positive, the European Commission must, by 22 October 2015, adopt a delegated act specifying the date when the non-EU AIFM passport will be "turned on". While this process is underway QIAIFs can continue to be managed by non-EU AIFMs under the existing transitional arrangements until at least 22 October 2015 at which time the Central Bank's will revisit the position and, if necessary, revise to align it with the European Commission's decision and any transitional arrangements provided.

RIAIFs cannot avail of an EU Passport to distribute their funds to retail investors in the EU. As a consequence, the marketing of an RIAIF in any EU Member State will depend on the relevant fund's offering rules in that Member State.

KEY CHARACTERISTICS OF IRISH FUNDS

DOCUMENTING DERIVATIVES WITH FUNDS: KEY ISSUES

In documenting derivatives with Irish regulated funds the category and form of the particular fund has a material bearing on the detail and nature of the document and assessment of legal risk. The primary task lies in identifying the correct parties to contract on behalf of the fund and ensuring that those parties and their respective obligations are described accurately.

It is important to review the constitutive documents of Irish regulated funds in particular to determine:

  • Nature of the Entity/Party: Consider the nature of the entity, who should be a party to the contract and applicable regulation.
  • Representations and Warranties:

Consider what additional representation, warranties and additional termination events may be required.

  • Confirming the counterparty's eligibility.
  • Conclusive reliance on any instruction, request, certificate or representation from the investment advisor or manager of the fund.
  • The fund has the power to enter into the transaction documents.
  • Additional Termination Events
  • Maintenance of the net asset value ("NAV")
  • Supervision of dealings in the fund and/or the fund's NAV.
  • Key personnel or delegation e.g. the AIFM, the investment manager, the depositary and the removal or reorganisation of the AIFM or investment manager.

 

  • The constitutional documents or the disclosure documents of the fund will not be altered in a material way without the prior consent of the counterparty.
  • Breach of UCITS requirements or AIF Rulebook

Liabilities of Parties/Segregated Liability: Establish the respective liabilities of the parties

  • Additional Provisions: Consider eligible counterparties, termination at fair value and mark to mark valuations of transactions.

EUROPEAN MARKET INFRASTRUCTURE REGULATION ("EMIR")

EMIR is the EU Regulation on OTC derivatives, central counterparties and trade repositories. Amongst other things, it imposes:

  • mandatory central counterparty clearing of certain standarised OTC derivate contracts. Funds will need to negotiate documentation at the appropriate time to allow derivatives transactions entered into after the relevant clearing obligation date to be cleared through a central clearing counterparty;
  • funds are required to have in place risk management procedures that require the timely, accurate, and appropriately segregated exchange of collateral in respect of uncleared derivatives contracts and;
  • EMIR requires that each party to a derivatives contract report prescribed details of the transaction to a trade repository.

Parties may consider incorporating the terms of the ISDA 2013 EMIR Portfolio Reconciliation Dispute Resolution and Disclosure Protocol into their agreement.

MARKETS IN FINANCIAL INSTRUMENT REGULATION ("MIFIR")

The primary purpose of the MiFIR trading obligation is to determine which of those derivatives subject to the EMIR clearing obligations should also be required to trade on a regulated market, Multilateral Trading Facility ("MTF"), Organised Trading Facility ("OTF"), or equivalent third country venue when traded by relevant counterparties. MiFIR will apply to derivative contracts that are both cleared through and a central counterparty ("CCP") and deemed sufficiently liquid to trade on a trading venue and concluded with the following counterparties:

  • Financial Counterparties as defined by EMIR which broadly are investment firms and credit institutions; and
  • Non-Financial Counterparties that meet conditions stipulated by EMIR to be covered by the clearing obligation.

These trading venues must report details of transactions which are executed through their systems by a firm which is not itself subject to the MiFIR transaction reporting regime. MiFIR is expected to come into force in Ireland on 3rd January 2017.

NETTING

A favourable regime for netting exists in Ireland for netting in the context of Irish regulated funds. Of note, the Netting Act 1995 will apply, amongst others, to the National Treasury Management Agency ("NTMA"). The NTMA was established as a statutory corporation to perform the delegated functions of the Minister for Finance such as engaging in transactions of a normal banking nature. The entry by the NTMA into ISDA Agreements and similar banking arrangements are likely to be of a private law character for commercial purposes, and not within the sphere of Government or sovereign activity.

IRELAND STRATEGIC INVESTMENT FUND ("ISIF")

The NTMA also controls and manages the ISIF, which was established in December 2014 with a statutory mandate to hold or invest assets (whether in Ireland or abroad) in order to support economic activity and employment in Ireland. Provided that certain conditions are satisfied, such as the rights and obligations of the NTMA acting on behalf of ISIF being identical, the Netting Act may apply to an agreement where the ISIF is a counterparty.

PRIME BROKERS

QIAIFs will not be subject to the Central Bank non-UCITS guidance note on prime brokers 1. The new regime will instead rely on provisions of AIFMD which require care and due diligence in the selection and appointment of prime brokers and for the prime brokers to discharge reporting obligations. The prime broker must be subject to ongoing supervision by a public authority, be financially sound and have the necessary organisational structure and resources to perform the services which are to be provided by them to the AIFM or the AIF. The prime broker is defined in

1. Qualifying investors funds ("QIFs") that do not have an EU AIFM and continue to operate under the Central Bank's non-UCITS Notices continue to be subject to the Central Bank non-UCITS guidance note on prime brokers and other OTC counterparties.

AIFMD and generally includes a credit institution, a regulated investment firm or another entity subject to prudential regulation and on-going supervision.

REGULATION

 The Central Bank of Ireland is the relevant regulator in Ireland for funds established as UCITS or AIFs in Ireland. It has issued UCITS Notices which apply to UCITS. Copies are available here.  The Central Bank AIF Rulebook June 2015 can be found here.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.